Europe's Better Than Expected GDP Growth Could Now Kill Its Most Important Deficit Reforms

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Europe could be rebounding too fast for its own good, worries the Economist’s Charlemagne column.Today the European Commission hiked its 2010 GDP growth forecast for the European Union to 1.8% from the 1% rate predicted in May. European economic growth has been far stronger than previously expected.

Problem is, while economic growth is generally good news, too much growth might remove the pressure on European nations to get their fiscal houses in order. It’s hard to argue spending cuts and budget limits while cheering higher than expected growth at the same time.

This poses a challenge for the Eurozone, which is trying to correct the past flagrant disregard for budget targets required for membership in the currency union.


A more immediate worry, moreover, is that the improving outlook will lead states to water down the commission’s legislative proposals on tightening up governance of the euro zone, due to be published later this month. One priority will be to encourage, or compel, euro-zone governments zone to stick by the deficit limits imposed by the stability and growth pact.

Eurozone nations have been trying to agree on a method for penalising nations who violate budge limit, given the budget violations which led to Europe’s current predicament. Thing is, the necessary reforms haven’t been completed yet.

In short, everybody agrees that penalties are needed. But everybody wants someone else to be penalised. Narrow self-interest might only be overcome by the fear of another crisis. But with much of Europe back on the path of growth, that seems less imminent. Mr Rehn is not cheering too loudly. It is not just American officials, it seems, who think a serious crisis should not be allowed to “go to waste”.

Thus many Eurozone reformers are secretly dreaming for an economic recovery that isn’t too strong in the near-term.

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